Small caps snap 600, Dow violates 10,000 as commodities tank

Kevin Pendley | Oct 06, 2008 1:41pm EDT | Comment

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Small-cap stocks proved that Friday’s failure in the afterglow of the financial rescue plan was no quirk as the Russell 2000 snapped key psychological support at 600 at the same time that the Dow breached the big 10,000 benchmark. At 1:29 p.m. ET, the Russell 2000 (NYSE:IWM) was down 32.95, or 5.32%, at 586.45, the lowest level since May 2005.

Today’s slide has been remarkable so far not just for the severity of the decline, but also for the broad-based nature of the move. At midday, not one single broad S&P sector group was in positive territory though there were a stunning 10 groups with losses beyond 10%. While the steepest losses were tied to commodity themes, financial shares were also getting hammered with the Financial Select Sector SPDR sinking more than 5% and the PHLX KBW Banking Index down more than 7%.

The U.S. dollar was on a roll against the euro, rising to 13-month highs, but the strong dollar also makes commodities priced in dollar terms more expensive (although clearly the bigger concern was tied to demand worries amid a global downturn). The Commodity Research Bureau Index was down 3.8% at mid-session to the lowest point in more than 12 months. Corn, cotton and cattle futures all collapsed down their daily trading limits on futures markets, and the commodity most equities traders keep an eye on — crude oil — was off some $4 a barrel to some eight-month lows.

Looking at stock market sectors, oil and gas drillers were getting drilled, steel stocks were hammered, oil refinery shares were slippery, coal stocks were getting burned and even metal and mining stocks were caving in. The U.S. dollar was up more than 2% against the euro, or a stunning 289 basis points. Unfortunately, the rally in the greenback versus the euro was more a reflection of worries about the eurozone economy than strength in the U.S. market. The euro/yen currency cross was down a mind-boggling 6.2%, or some 900 bps, which borders on the absurd for any FX market.

Aside from a total evacuation out of Europe assets, the market was searching for a safe-haven to park cash. With equities at three-year lows and commodities on a sudden fire sale, the only place attracting money were credit markets — especially Treasury instruments. The yield on the benchmark 10-year note (which moves inversely to price) was up over 3.4% as money took flight from stocks.

Among individual small-cap stocks, Sunrise Senior Living Inc. (NYSE:SRZ) was off 27% to the lowest point in more than five years. Also, Blackrock Ecosolutions Investment Trust (NYSE:BQR) was down some 25% at historic lows for the trust. Bucking the overall downdraft, Dendreon Corp. (Nasdaq:DNDN) rallied 47%, gapping higher on unusually brisk volume as a study found that its experimental prostate cancer drug reduced death risk by 20%.

The freefall in the Russell finally slowed approaching chart support ahead of the 577 zone and the market had a decent eight-handle bounce off the lows into midday. Momentum readings are dramatically oversold, which could help stabilize things, but we’ll often see a move extended beyond typical readings in a panic situation, which is clearly where the market is right now.